The Black Swan: The Impact of the Highly Improbable

by Nassim Nicholas Taleb

This book may piss you off. If it doesn’t, then you don’t care about predictions or you don’t understand what it is saying.

I like it, but, still, I can see how many people would be upset by being called idiots by Taleb.

The premise of The Black Swan is that highly improbable events happen. That’s it. Even though they are improbable, they still happen. Taleb makes a convincing argument that most of us confuse “improbable’ with “impossible.” Events that alter our lives or the course of human history happen more often than we like to think and any type of prediction or prognostication that does not include the posibility of these events is one step above meaningless.

Two examples that Taleb uses to illustrate his point are 9/11 and the creation of Google. Sept 11, 2001 changed the way Americans and, indeed, the rest of the world viewed national security and terrorism. It created two wars in foreign countries and altered the history of several countries forever. How many people saw it coming and planned accordingly?

The Google analogy is equally potent. Google started as a search engine to rival Yahoo and a few other minor competitors. Google has now changed the way we use the internet and, by extension, the way we interact with each other on a global scale. Who would have predicted that the term “Google” would be transformed into a verb roughly translated into “find something on the internet?”

The bare-bones point of these analogies is that almost nobody planned for these two events to alter our lives as they have. Yet, events like this happen almost yearly. Why don’t we expect them and how can we anticipate them?

I will leave the explanation of those two conundrums to Taleb, but suffice it to say that he makes convincing arguments that we, basically, suck at predicting anything. We try to oversimplify everything into a nice, neat equation or number and to do so is incredibly presumptuous.

I don’t want to dive into the concepts of the book too deeply, but I do want to point out one other concept that I found particularly thought-provoking.

Taleb discusses the idea of the imbalance between negative and positive confirmation. Simply put, we need infinite examples of an event occurring to say that event is true. We only need one example of that event not happening to figure out that the even is not true. My favorite example is the turkey owner example.

A turkey sees his owner bring him food and water every day. The owner brings the turkey sustenance every day for 1000 days and the turkey “knows” that his owner is there to take care of him. And then, Thanksgiving rolls around. The owner brings his axe to the turkey and not food or water.

That turkey had 1000 examples to support the theory that “my owner will take care of me.” It now has 1 example of “my owner will not take care of me.” That is the asymmetry of confirmation. One negative example can overrule hundreds, thousands, or even millions of positive examples.

Consider the statement: “The stock market has never lost 1000 points in a single day.” Then . . . it did. So, I suppose we can’t say that the stock market will never lose 1000 points in a single day, because we have seen otherwise.

There are dozens of examples that Taleb gives to illustrate this point and I will defer to his writing talents, but I thought it would be interesting to bring up here.

Why should a commercial real estate pro read this book?

Because models and projections run this business. Every decision we make is based on assumptions about rent growth, exit cap rates, ability to pay loans, etc. Our business is based on the ability to predict the future and, frankly, we aren’t very good at it.

I will write an article later about how to incorporate Black Swans into project analysis, but for now, read the book.

As a warning, Taleb can be pedantic and unmerciful. He has enough money that he doesn’t care about hurting anyone’s feelings and that allows him to be brutally honest and, in my opinion, makes him more readable. He skates the fine line of philosophy and practice. I enjoy philosophy, so it isn’t a problem for me but some readers may be turned off by his tone and presentation.

All in all, I would say The Black Swan is a worthy addition to your library and worth the time to read it. But consider yourself warned about Taleb’s sharp tongue.

The Black Swan in Two Sentences: We fool ourselves by basing our decisions on predictions of the future while refusing to acknowledge how poorly we can predict anything since we do not incorporate the probability of the highly improbable. Life and its components are not simple or easy to understand and any attempt to simplify them into formulaic or numerical predictions should be taken with a HUGE grain of salt.